Friday, March 6, 2009

European Central Banks Cut Rates to Record Lows

Posted by Bashir Ahmad Fida

European Central Banks Cut Rates to Record Lows

By JOELLEN PERRY and MARCUS WALKER in Wall Street


The European Central Bank and the Bank of England cut interest rates to record lows on Thursday, further underlining the severity of the economic downturn in the 27-nation European Union.

The Bank of England also announced a seldom-used measure known as "quantitative easing." The £75 billion ($105.96 billion) program is aimed at boosting banks' lending by buying assets directly with newly created money.

ECB President Jean-Claude Trichet suggested new measures are in the offing, saying the bank is "discussing and studying possible new nonstandard tools. We exclude nothing."

Official figures Thursday confirmed that euro-zone gross domestic product in the fourth quarter of 2008 shrank by 1.5%, the worst contraction on record. On an annualized basis, the economy contracted by 5.8%.

While the drop was led mostly by a fall in exports, a surprising fall in consumer spending also contributed -- undermining hopes that receding inflation can buoy spending in the face of mounting job cuts.

Collapsing global trade is walloping export-dependent countries such as Germany. At the same time, the threat of job losses are damping the consumer spending that has traditionally been a strength in economies of countries such as the U.K., France and Spain. Euro-zone unemployment hit a two-year high of 8.2% in January as companies cut swaths of workers, adding strain to already-struggling state coffers.

Economy

"Pretty much everywhere you look in Europe, the news is awful," said Ken Wattret, economist with BNP Paribas in London.

Companies across Europe echoed the bleak outlook. "At the beginning of 2009, I thought we would see an economic recovery from the middle of this year," says Jan Alblas, owner and head of Dutch logistics company Alblas InternationaalTransport BV, which specializes in trucking goods between the Netherlands and Germany and the EU's new member countries in Central and Eastern Europe.

Until 2007, business was booming along with trade between Europe's East and West. Now, with cross-border trade collapsing, Mr. Alblas says recovery "will take much longer."

In a press briefing after the ECB lowered its key rate by half a percentage point to 1.5%, Mr. Trichet stressed that was not "the lowest level," though he repeated he sees "a number of drawbacks" to taking interest rates near zero -- as the U.S. Federal Reserve has done.

Mr. Trichet also said inflation pressures are receding markedly in the face of the economic slowdown, leading many economists to predict the central bank could lower its key rate to 1% or 0.5% this year.


ECB Cuts Rates To Near Zero

The European Central Bank cut its key rate to near zero Thursday. ECB President Jean-Claude Trichet said board members agreed an easing was needed after an in-depth discussion about euro-zone economic conditions.

The Bank of England lopped a half percentage point from its key rate to bring borrowing costs to 0.5%, their lowest since the bank's founding in 1694.

Its plan to purchase government and corporate debt with the new £75 billion program will funnel funds to the struggling banking system, which could increase banks' ability to make new loans.

ECB policy makers have been reluctant to take such measures. But Mr. Trichet said Thursday the central bank will continue offering euro-zone banks unlimited loans at the central bank's policy rate until at least the end of this year.

That program, launched last October and originally set to expire at the end of this month, has so far helped to swell the central bank's balance sheet by some €600 billion.

Jean-Claude Trichet, president of the European Central Bank, announced in Frankfurt Thursday the ECB will cut a key interest rate to a record low.

ECB staff radically lowered forecasts for the $12.2 trillion euro-zone economy's performance this year, predicting it will shrink by about 2.7%. That's far worse than a December forecast of a contraction of about 0.5% and well below the International Monetary Fund's estimate of a 2% contraction.

The ECB forecasts essentially flat growth in 2010. The Bank of England's nine-member rate-setting committee said Thursday that the pace of the U.K.'s fourth-quarter contraction -- output there also shrank by 1.5% -- likely continued through the beginning of this year, as surveys suggest consumer spending and business investment continued to fall.

The rapidly worsening outlook in Europe's Eastern countries is also pulling down growth in the West and raising questions about whether Western policy makers should do more to prop up their struggling neighbors.

Policy makers in financially strong European countries such as Germany have said in the last two weeks that they would intervene to save a euro-zone country from bankruptcy. But Western Europe has so far rejected calls from Hungary and the World Bank for concerted aid to the East, saying such aid should come from organizations such as the IMF. So far, European nations Hungary, Latvia and Ukraine have already turned to the IMF for aid. Mr. Trichet hinted Thursday that self-preservation might yet motivate Western Europe to come to the east's aid. Stressing it was "possible" that countries in "exceptional difficulty" could get help from the EU, its wealthier governments or the central bank itself, he said, "our first duty is to understand that we are all in an inter-dependency mode."


-- Mark Whitehouse, Neil Shah and Sebastian Moffett contributed to this article.



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